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Chapter 10: Q21E (page 539)

(Analysis of Subsequent Expenditures) King Donovan 91影视 Group has been in its plant facility for 15 years. Although the plant is quite functional, numerous repair costs are incurred to maintain it in sound working order. The company鈥檚 plant asset book value is currently \(800,000, as indicated below.

Original cost

\)1,200,000

Accumulated depreciation

400,000

Book value

\( 800,000

The following expenditures were made to the plant facility during the current year.

  1. Because of increased demand for its product, the company increased its plant capacity by building a new addition at \)270,000.
  2. The entire plant was repainted at a cost of \(23,000.
  3. The roof was an asbestos cement slate. For safety purposes, it was removed and replaced with a wood shingle roof at a cost of \)61,000. Book value of the old roof was \(41,000.
  4. The electrical system was completely updated at a cost of \)22,000. The cost of the old electrical system was not known. It is estimated that the useful life of the building will not change as a result of this updating.
  5. A series of major repairs were made at a cost of $47,000, because parts of the wood structure were rotting. The cost of the old wood structure was not known. These extensive repairs are estimated to increase the useful life of the building.

Instructions

Indicate how each of these transactions would be recorded in the accounting records.

Short Answer

Expert verified
  1. Plant assets should be capitalized
  2. Painting costs are considered ordinary repairs
  3. Replacing the old plant roof is supposed to increase the service life of the property.
  4. Conceptually, the book value of the old electricity system needs to be removed.
  5. With an increase in useful life, a debit to accumulated depreciation occurs.

Step by step solution

01

Meaning of Subsequent Expenditure

Subsequent expenses are those incurred after an asset is recorded in the financial statement and delivered to the destination and state planned. Repairs, upkeep, overhauls, upgrades, and replacements could all cost money.

02

(a) Indicating the transaction and explaining its accounting records

Date

Accounts and Explanation

Debit($)

Credit($)

Plant

270,000

Cash

270,000

(To record the addition made)

Plant assets are capitalized when they are added since a new asset has been created. As a result, this enhancement makes the plant more valuable.

03

(b) Indicating the transaction and detailing its accounting records

Date

Accounts and Explanation

Debit($)

Credit($)

Improvement expense

23,000

Cash

23,000

(To record the improvement made)

Expenditures that do not improve the asset's service benefits are expensed. Painting expenditures are considered standard repairs since they keep the asset in good working order or return it to its previous state.

04

(c) Indicating the transaction and explaining its accounting records

Date

Accounts and Explanation

Debit($)

Credit($)

Plant -roof

61,000

Loss on disposal

41,000

Plant-roof (old)

41,000

Cash

61,000

(To record the replacement made)

Investing in the new roof will increase the service potential of the asset.

05

(d) Indicating the transaction and detailing its accounting records.

Date

Accounts and Explanation

Debit($)

Credit($)

Repair expense

22,000

Cash

22,000

(To record the repair expense)

The book value of the preceding electrical system needs to be conceptually removed. However, in practice, it is generally difficult, if not impossible, to determine this quantity. In this situation, one of two techniques is used.

The second method is to reduce accumulated depreciation, assuming the replacement will prolong the asset's useful life and recover part or all of the previous depreciation. The difficulty with our current position is that the useful life has not increased, so it is unfair to debit accumulated depreciation. Consequently, must include this expense in the cost of the plant facility.

06

(e) Indicating the transaction and explaining its accounting records.

Date

Accounts and Explanation

Debit($)

Credit($)

Accumulated depreciation

47,000

Cash

47,000

(To record the addition made)

A detailed clarification is given in the transaction (d) answer. Since the asset's useful life has risen, a debit to Accumulated Depreciation appears to be the best option in this instance.

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Most popular questions from this chapter

  1. Belanna Industries Inc. acquired land, buildings, and equipment from a bankrupt company, Torres Co., for a lump-sum price of \(700,000. At the time of purchase, Torres鈥檚 assets had the following book and appraisal values.

Book Values

Appraisal Values

Land

\)200,000

\(150,000

Buildings

250,000

350,000

Equipment

300,000

300,000

To be conservative, the company decided to take the lower of the two values for each asset acquired. The following entry was made.

Land 150,000

Buildings 250,000

Equipment 300,000

Cash 700,000

  1. Harry Enterprises purchased store equipment by making a \)2,000 cash down payment and signing a 1-year, \(23,000, 10% note payable. The purchase was recorded as follows.

Equipment 27,300

Cash 2,000

Notes Payable 23,000

Interest Payable 2,300

  1. Kim Company purchased office equipment for \)20,000, terms 2/10, n/30. Because the company intended to take the discount, it made no entry until it paid for the acquisition. The entry was:

Equipment 20,000

Cash 19,600

Purchase Discounts 400

  1. Kaisson Inc. recently received at zero cost land from the Village of Cardassia as an inducement to locate its business in the Village. The appraised value of the land is \(27,000. The company made no entry to record the land because it had no cost basis.
  2. Zimmerman Company built a warehouse for \)600,000. It could have purchased the building for $740,000. The controller made the following entry.

Buildings740,000

Cash 600,000

Profit on Construction 140,000

Instructions

Prepare the entry that should have been made at the date of each acquisition.

(Purchase of Computer with Zero-Interest-Bearing Debt) Cardinals Corporation purchased a computer on December 31, 2016, for \(105,000, paying \)30,000 down and agreeing to pay the balance in five equal installments of $15,000 payable each December 31 beginning in 2017. An assumed interest rate of 10% is implicit in the purchase price.

Instructions

(Round to two decimal places.)

  1. Prepare the journal entry(ies) at the date of purchase.
  2. Prepare the journal entry(ies) at December 31, 2017, to record the payment and interest (effective-interest method employed).
  3. Prepare the journal entry(ies) at December 31, 2018, to record the payment and interest (effective-interest method employed).

(Capitalization of Interest) Vania Magazine Company started construction of a warehouse building for its own use at an estimated cost of \(5,000,000 on January 1, 2016, and completed the building on December 31, 2016. During the construction period, Vania has the following debt obligations outstanding.

Construction loan鈥�12% interest, payable semiannually, issued December 31, 2015

\)2,000,000

Short-term loan鈥�10% interest, payable monthly, and principal payable at maturity, on May 30, 2017

1,400,000

Long-term loan鈥�11% interest, payable on January 1 of each year; principal payable on January 1, 2019

1,000,000

Total cost amounted to \(5,200,000, and the weighted average of accumulated expenditures was \)3,500,000.

Jane Esplanade, the president of the company, has been shown the costs associated with this construction project and capitalized on the balance sheet. She is bothered by the 鈥渁voidable interest鈥� included in the cost. She argues that, first, all the interest is unavoidable鈥攏o one lends money without expecting to be compensated for it. Second, why can鈥檛 the company use all the interest on all the loans when computing this avoidable interest? Finally, why can鈥檛 her company capitalize all the annual interest that accrued over the period of construction?

Instructions

(Round the weighted-average interest rate to two decimal places.)

You are the manager of accounting for the company. In a memo, explain what avoidable interest is, how you computed it (being especially careful to explain why you used the interest rates that you did), and why the company cannot capitalize all its interest for the year. Attach a schedule supporting any computations that you use.

Use the information for Navajo Corporation from BE10-8. Prepare the journal entry to record the exchange, assuming the exchange lacks commercial substance.

Hanson Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were \(1,800,000 on March 1, \)1,200,000 on June 1, and $3,000,000 on December 31. Compute Hanson鈥檚 weighted-average accumulated expenditures for interest capitalization purposes.
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